ECB’s Müller: ‘What Is Important Is the Change of Tone in the Messages of the Governing Council’

17 December 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller on Friday said that the ‘change of tone’ in the messages sent yesterday by the ECB’s decisions were an important reflection of the potential need to tighten policy faster than anticipated.

In a blog post on the website of the Estonian central bank, which he heads, Müller wrote, ‘The outlook as a whole is optimistic: the economy is recovering rapidly from the crisis, unemployment is falling to an all-time low and people's incomes are rising.’

However, ‘the sharp rise in prices in recent months has come as an unpleasant surprise to everyone, and it is also forcing euro area central bankers to adjust their plans’, he continued. ‘Almost half of the rapid rise in prices is due to higher energy prices, but the prices of more and more other goods and services are also rising.’

The inevitable deceleration of energy prices implies that headline inflation will cool off soon as well, he said. Moreover, supply constraints will also ease, he said.

Müller warned that ‘the longer the price increase remains relatively fast, the more likely it is that it will be passed on to more and more goods and services’, meaning that monetary authorities ‘cannot ignore the accelerated rise in prices, even if a slowdown is expected in the near future.’

‘The changed inflation outlook requires a change in the monetary policy stance’, he wrote. ‘Understandably, however, this is being done with caution, as uncertainty about near-term economic developments remains high.’

‘For me, what is important is the change of tone in the messages of the Governing Council’, he said. ‘The acceleration in price increases and the improvement in the economic situation will allow the central bank to reduce the injection of money into the economy and to clearly set a course of "normalisation" of central bank policy.’

This, he asserted, was mirrored in market views that a rate hike could come in early 2023. The ECB decisions show that rather than being focused entirely on low growth and inflation, policymakers are ready to counter the opposite scenario, he said. ‘In that case, we are also prepared to tighten monetary policy more rapidly than described above’, he wrote.

Müller urged Estonians taking out long-term loans ‘to assess your ability to repay even if interest rates rise sharply.’